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H IDDEN DEBT
BOX 4.1 Recommendations for Improving Fiscal Reporting and Transparency in Pakistan Given Pakistan’s high debt ratio and general fi scal stress, more attention to monitoring and disclosing subnational fiscal risks is especially warranted. While provincial debt may be under control now, the lack of transparency elevates fiscal risks in the near and medium terms. In addition to the general recommendations presented in this chapter, the federal government or the Controller General of Accounts could establish some standards about what is considered subnational public debt and mandate a format against which all provinces must report debt stocks. Provincial debt bulletins should provide a clearer breakdown of domestic and external debt figures, especially on (1) commodity financing; (2) debt to the federal government; (3) guarantees by type/sector of institution; and (4) type of creditors. Costs of debt should also be made explicit along with information on redemption schedules. To improve transparency, reporting should be made public on the websites of the province’s finance departments and as part of the Debt Policy Coordination Office’s (DPCO) publications. Eventually, standardized provincial debt
databases should be institutionalized and aligned with the federal Debt Management and Financial Analysis System (DMFAS). Pakistani provinces should also endeavor to identify and report on contingent liabilities by reporting on the number and total amount of guarantees explicitly issued to both private and public enterprises on a regular basis. Some discussion of implicit obligations (such as those embedded in contracts for public-private partnerships) should also be included, at least qualitatively, in provincial budget documents. The governments of Punjab and Sindh do this to some extent in their latest white papers on their respective budgets, but do not undertake systematic evaluations of such implicit contingent liabilities. Continuing to improve the functioning of provincial debt management offices and the coherence of debt management strategies would help provinces build the capacity to undertake such an assessment, and in doing so minimize the likelihood of unexpected contingent liability shocks in the future.a a. All provinces except Balochistan have established debt management units.
excessive debt must obtain approval from the MFOC for all major revenue, expenditure, and borrowing decisions. The MFOC can also withhold transfers and recommend to the minister of local government that a municipality have its fiscal powers vested in a financial management board. As subnational fiscal autonomy grows, countries should consider instituting robust guarantee management frameworks and policies. This involves adopting the necessary legislation for the issuance of guarantees, clear procedures for assessing and monitoring such guarantees, and ideally, a register of subnational guarantees maintained at the subnational level and/or central level. In India, state governments impose guarantee fees varying from 0.5 percent to 2 percent of the total guarantee amount, but this is often waived in practice (RBI 2019a). Although several states
have limits on outstanding risk-weighted guarantees, in accordance with their fiscal responsibility legislation, it is important that the states (1) calculate these risk weights accurately; (2) undertake debt sustainability analysis on total public and publicly guaranteed debt; and (3) place limits on guarantees in relation to their credit risks. Market Pricing Markets play an important role in influencing the fiscal behavior of subnational governments. When access to debt markets and borrowing costs reflect the likelihood of fiscal stress, policy makers have an incentive to sustain fiscal discipline (de Groot, HolmHadulla, and Leiner-Killinger 2015). There is evidence, however, that this mechanism does not function effectively. In India, yields vary too little across states to reflect any fiscal
